Marathon Digital: A Centralized Proxy For Bitcoin Investment

Marathon Digital: A Centralized Proxy For Bitcoin Investment

Investment Thesis

Investors who are bullish on Bitcoin and the cryptocurrency space are most likely to consider direct exposure to various cryptocurrencies.

However, with time, there are an increasing number of proxy investment ideas that can be considered for exposure to Bitcoin.

One way for exposure is through the centralized route. By considering buying shares in a Bitcoin mining company.

There are several Bitcoin miners listed on the stock exchange in the United States. Marathon Digital (NASDAQ:MARA) is among the most attractive Bitcoin miners to consider.

This investment thesis will discuss the reasons to be bullish on Marathon Digital for 2022 and beyond.

Price Action Overview

It goes without saying that Marathon Digital price action is closely linked with the trend in Bitcoin.

When Bitcoin touched highs of $69,000, Marathon Digital shares also surged to highs of $83.5. However, with a steep correction in Bitcoin, the stock currently trades at $25.0.

It seems that the correction is overdone and Marathon Digital stock is poised for a rally in the coming quarters.

Let’s discuss the potential catalysts.

Strong Upside in Mining Activities

For the third quarter of 2021, Marathon Digital reported total revenue of $51.7 million. On a year-on-year basis, the company’s revenue increased by 76%. Further, for the quarter, the company mined 1,252 Bitcoins, which was higher by 91% on a y-o-y basis.

Clearly, Marathon Digital has been on a high growth trajectory. There are two more important points to note from a growth perspective.

First and foremost, Marathon Digital reported cash and equivalents of $623.7 million as of December 2021. Additionally, the company had $315.6 million worth of Bitcoin holdings. Marathon also has $100 million in undrawn credit facilities. Therefore, the company has ample financial flexibility to pursue aggressive expansion in mining activities.

Furthermore, for Q3 2021, the company increased the hash rate to 2.7EH/s. With more miners being deployed, Marathon Digital expects to increase the hash rate to 13.3EH/s by mid-2022. This would imply a five-folds growth in mining capacity in the next six months.

Estimate on Revenue and Cash Flows

By the company’s own estimate, once all the miners are deployed, Marathon Digital expects to mine 66 Bitcoins on a daily basis. This would imply a monthly Bitcoin mined of 1,980.

Further, let’s assume a scenario where Bitcoin is trading at $40,000. Considering the monthly Bitcoins mined, the revenue potential after mid-2022 will be $79 million (monthly). Or, $950 million on an annual basis.

Let’s consider a more optimistic scenario where Bitcoin is trading at $50,000. This would translate into monthly revenue of $99 million or an annual revenue potential of $1.2 billion.

The chart below gives the revenue and gross profit estimate based on different Bitcoin price scenarios.

Clearly, the best part of revenue and cash flow upside is still to come for Marathon Digital. It’s also worth noting that Marathon Digital expects blended mining cost of $6,235 per Bitcoin.

Therefore, there is strong visibility for upside in EBITDA and cash flows. For Marathon Digital, there are two options –

First, to hold the Bitcoin in the balance sheet. Second, to sell the Bitcoin mined and pursue further mining expansion and diversification.

I believe that Marathon Digital will pursue a mix of the strategy. With the cryptocurrency space still evolving, there are attractive investment opportunities.

Hive Blockchain (NASDAQ:HIVE) is another Bitcoin and Ethereum miner. The company has been using its cash buffer to acquire strategic stake in areas that include decentralized finance and NFT. This is just one example of the possible diversification route.

The key point however is that Marathon Digital is positioned for multi-fold growth in revenue and cash flow in 2022 and 2023.

Bottom Line

Another reason to like Marathon Digital is the company’s push towards carbon neutral mining. By the end of 2022, Marathon expects 100% carbon neutral mining operations.

Coming back to the stock price, it seems very likely that Marathon will re-test all-time highs once all miners are deployed. Of course, Bitcoin needs to trend higher for cash flows to be robust.

I am bullish on Bitcoin even with the rate hike factor. The correction in Bitcoin has discounted the liquidity tightening in the global financial system. With growing adoption, Bitcoin is likely to resume the uptrend.

Overall, Marathon Digital is positioned to be a value creator. I would not be surprised if MARA stock doubles in the next 12-months.

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